The privatisation funds are specific investment
companies. In this sense as the first representatives of this type
of economic entity they will have their own importance for capital
market development in Bulgaria. In their role as instruments for
'mass' investment their establishment is associated with the
application of the programme for mass privatisation. In addition,
the privatisation funds are a separate group of issuers which will
supply the capital market with "goods" (their own shares - although
at the initial stage they are a little immobile) of which the
quality will be determined by the funds' successful performance.
The Czech experience upon completion of the mass privatisation
undoubtedly proves such a relation between privatisation funds'
existence and the capital market development despite the problems
with the banking system, the lack of transparency, etc.

The three main objectives to be achieved with the
establishment of the privatisation funds in Central and Eastern
European countries within the mass privatisation programmes
framework are:

to encourage the possession of shares by a large
part of the population, in order to diversify the investment
portfolio and reduce the risk for the small investors;

to stimulate financial market development through
more massive investment by the population in different types of
securities and the emergence of investment intermediaries and
institutional investors;

to introduce more quickly and easily the system for
corporate management by concentration of the property acquired by a
number of physical and legal persons as a result of the mass
privatisation scheme.

Although the objectives of the Central and Eastern
European countries are by and large similar, their practices with
regard to regulating the privatisation funds activities and the
actual results of their establishment differ considerably.
Bulgarian privatisation funds have their specific place in the
whole picture. The mass privatisation in Bulgaria was put off for a
long time and the initial results of what is to be considered as
its preparatory stages still do not allow a serious analysis of its
achievements and failures to be made. Nevertheless, the assessment
by means of a comparison with the other countries will help
identify the problems of the next stages and suggest alternative
solutions, especially because changes in the regulations are
necessary and forthcoming.

The privatisation funds in Bulgaria can be
classified as funds set up on the initiative of private physical
and legal persons (like in the Czech Republic, Russia, Ukraine),
whereas in Poland and Romania the state has kept the leading role.
The funds' main purpose is to act as intermediaries between the
population and the enterprises included in the mass privatisation
programme. In contrast with the Czech experience, the privatisation
funds' activities in Bulgaria have been comprehensively and
strictly regulated with a law before they were set up.

According to the Bulgarian legislation the
privatisation funds are specific investment companies which are
similar to holding structures in some respects - mainly the
character and structure of their investment portfolios. There were
extensive discussions before passing the privatisation funds law
and good intentions to create legal opportunities for the
privatised companies to find their 'real owner'. However, in fact
the legislators have made an eclectical mixture of two very
different forms of organisation and management - investment
companies and holdings. According to the existing regulations this
dual nature will be overcome after the mass privatisation
centralised auctions have been completed, i.e. when the
privatisation funds will have re-established their activities as
investment companies or holdings.

In 1996 - the year which can rightfully be called
'privatisation funds year' in Bulgaria - 81 privatisation funds out
of 141 applicants got their licenses from the Securities and Stock
Exchange Commission.

It is interesting that a large number of the funds
have directed their investment strategy towards a specific
enterprise or sector and about 30 of the funds are regional. This
contradicts with the investment company's main objective -
investment risk minimisation. The initiative for setting up such
funds comes from the managers of the enterprises on the mass
privatisation list or from the joint initiative of local government
representatives and local business elite. Most probably these funds
will merge with each other or with funds of national importance
after the mass privatisation has been completed. This is expected
because of envisaged difficulties in raising financial resources
for investment and modernisation of enterprises in the post
privatisation period.

Privatisation funds set up by the management bodies
of stable and rich companies of strategic importance that are
included in the mass privatisation list (e.g. "Petrol Fund",
"Neftochim Invest") are a more specific case. In a way they are a
substitute for the managers' privatisation. For some companies of
this group the mass privatisation prograrnme is the only possible
form/way for their privatisation. The investment vouchers of the
staff and their families and to a large extent of the local
population in these regions are an alternative to the cash
privatisation which is becoming more and more difficult to finance
by credits from Bulgarian banks as was the most common practice
until now.

There is international participation in 15 of the
privatisation funds which in some cases can be as high as 99% of
the initial capital. The management employee privatisation fund
"Labour and Capital" is an interesting phenomenon and this fund has
its special place among the rest. It can easily be classified as an
untypical privatisation fund judging by its main aims and
objectives i.e. "rehabilitation and stabilisation of privatised
companies and increasing the number of employees in these companies
as well as their wages".

The privatisation funds role in the future capital
market in Bulgaria and their importance for its development will be
determined mostly by the activities and the behaviour of a group of
10-1 5 largest funds in terms of capital attracted, as well as by
the outcome of the auction sessions.

The results of the first auction session were
announced at the end of 1996. From them one can make the general
conclusion that the privatisation funds have been most interested
in small and easily liquid companies which do not need considerable
restructuring. They are from the food-processing, light,
pharmaceutical, tourist industry and in most cases are export
oriented. After the first auction session the privatisation funds
obtained 35.86% out of the 41.36% of the enterprises' shares
sold.

The number one leader is "Doverie" fund with its
highly diversified portfolio (acquired shares of 90 companies) and
large number of shares acquired. A prerequisite for these
impressive results is that they have attracted the largest amount
of capital in privatisation vouchers. Moreover in over one third of
the enterprises "Doverie" fund has acquired 34% of the shares which
is the maximum legally allowed percentage of ownership of
shares.

Next in the list follow the Bulgarian-Dutch
Privatisation Fund, Privatisation funds "Labour and Capital",
"Bulgaria", "Mel Invest", "Zlaten lev", "Petrol Fund", "AKB Fores -
Social" etc. These funds managed to establish highly diversified
investment portfolios including a number of enterprises in which
their share is 34%.

Before the second auction session the privatisation
funds have about18 billion investment vouchers at their disposal,
i.e. a little over 25% of their voucher capital. The second auction
session will be the most significant within the first wave of the
mass privatisation. It will be then that the privatisation funds'
type of behaviour will become clear and their portfolios structure
will be shaped. It will be interesting to follow and analyse their
strategy for the second auction bearing in mind their investment
capacity is to a certain extent exhausted, the trend of reducing
the minimum prices after each session and the insignificant shares
of some key enterprises acquired in severe competition. After the
completion of the second session it will be easier to forecast the
future of the main group of privatisation funds and they could be
classified in several groups: those preferring to be transformed
into investment companies; those preferring to be transformed into
holdings and those funds with an undefined future.

The sooner more favourable conditions for
transforming privatisation funds into investment companies or
holdings are created, the sooner their positive influence on the
capital market in Bulgaria will become evident. Because of the
public interest this process will have to be encouraged by changes
in the legislation and will have to be completed before the end of
the privatisation process. The establishment in their pure form of
specialised structures - investment companies and holdings - will
facilitate the quicker development of a real market of corporate
securities, stimulate the secondary restructuring of ownership thus
the companies will be finally in the hands of their true owners.
The privatisation funds themselves, especially those who consider
professionally their future, also realise this necessity and become
more oriented to restructure their portfolios in a way
characteristic of one of the two types.

The experience of the countries from Central and
Eastern Europe shows that the privatisation funds successfully
fulfil the tasks of an intermediary of the formal transfer of
ownership in private hands. There are also a number of good
examples of their importance in attracting the interest of foreign
investors in the country. In the short run their role in the
development of the capital market is relatively limited and is
concentrated mainIy on increasing the supply of shares liquid
companies. The long run positive impact will depend on the future
of the privatisation funds as the most active player on the capital
market.